Watchful eyes on emissions projects

It’s not going to be enough for emissions reduction project developers to satisfy host governments and the Kyoto rulebook – environmental groups are beginning to scrutinise potential projects. Kirsty Hamilton reports

Six months on from the landmark Marrakech Accords, investors and developers are beginning to bring forward projects that will earn carbon credits under the terms of the Clean Development Mechanism (CDM). But the controversies that plagued the diplomatic negotiations that led to the Accords have not gone away – and investors face vigorous opposition from activists to projects that fail to meet its environmental criteria.

The Accords laid out many of the rules underpinning the Kyoto Protocol, the 1997 international agreement to cap industrialised world emissions of greenhouse gases (GHGs). They included the creation of an executive board to supervise the CDM, by which investors can earn

Will BP’s Brazil project pass NGO muster?

carbon credits from projects in developing world countries that reduce or avoid GHGs.

The non-governmental organisation (NGO) community had mixed success in its defence of the highest possible levels of environmental integrity for the CDM process: NGOs failed to introduce a ‘positive list’ of acceptable technologies such as renewable energy, for example.

But the CDM rulebook does contain a requirement that projects contribute to sustainable development.While this judgement lies with the host government, NGOs and other stakeholders have a 30-day period in which to raise concerns in this, or any other, area.These comments form official input as part of the prescribed validation and registration process, creating an unknown factor in the project development cycle that investors can’t ignore.

And the NGO community is mobilising. WWF, for example, is developing a ‘carbon label’ to certify ‘high quality’ CDM projects. After Marrakech, a number of NGOs have come together to form CDM Watch, to monitor project developments on the ground and provide support to southern NGOs. And the South Africa-based development NGO SouthSouthNorth (SSN) Project is involved in extensive NGO capacity building and technical project development and assessment in South Africa, Brazil, Bangladesh and Indonesia.

The tiny but growing market in ‘event offsets’ is giving a foretaste of the issues that could bedevil CDM projects. For example, CDM Watch has slammed the credits bought by the World Economic Forum to offset emissions caused by participants at its January meeting in New York this year.

The offsets were bought from an operating geothermal plant in Indonesia, against a baseline of what would happen if the plant were to close.This raised questions among activists over the so-called ‘additionality’ of the offsets – namely, whether they represent additional emissions reductions compared to what would otherwise have occurred.

However, Natsource, which brokered the trade, argues the criticisms are unfair. Dirk Forrister, its Colorado-based managing director, says the offsets – which he says met the buyer’s environmental additionality and geographic requirements – were never touted as official CDM credits, and were designed to offset emissions that do not fall under the terms of Kyoto.

“With a small 4,000 ton trade,WEF raised awareness of climate change among the world’s economic leaders, which is the important thing here. It showed the nature of the early, voluntary GHG market, where many innovative experiments are taking place, with considerable ‘learning by doing,’ especially through the discussion of issues afterwards,” he adds.

At present, Future Forests, a London-based organisation providing carbon offset services, and the World Business Council for Sustainable Development (WBCSD) are trying to establish a credible, non-Kyoto offset scheme for emissions associated with the World Summit on Sustainable Development (WSSD) in South Africa in August.

Its ‘Carbon Legacy Project’ (CLP) is intended to leave a sustainable development ‘legacy’ in Africa as well as offsetting emissions. It involves a multi-stakeholder governing body, including NGOs and business representatives. However, the process raises public credibility issues facing developers from the north, and some NGOs remain sceptical. Despite joining the stakeholder group, Richard Sherman from South Africa Climate Action Network says the project raises the danger of opening “opportunities for greenwashing and potential corporate product branding”.

SSN is also involved, because it sees the CLP as an important forum to affect the trend of future projects under the CDM, says SSN’s Steve North. One concrete result of NGO presence is an ‘off-list’ of projects that they consider unacceptable on environmental and sustainable development grounds: these include carbon sequestration and nuclear energy.

Without NGO involvement the CLP would have been no-go, says Paul Norrish, a consultant to Future Forests. However, NGOs were critical of pressure, particularly from the WBCSD, in the early days of the process when they raised questions about the project’s scope.“We were accused of holding up the process and potentially denying local people in SA access to financial resources that would deliver them energy resources,” says Sherman.

While these projects are explicitly outside the CDM process, NGOs such as WWF and SSN are developing more sophisticated tools to influence project development and the market for the ‘certified emissions reductions’ (CERs) that CDM projects generate.

The WWF branded ‘carbon label’ (see Environmental Finance, September 2001, page 13) is due to be launched later this year.The desired outcome is an environmentally-branded market for higher ‘quality’ – and higher priced – credits. WWF will use a three-tier screening process: a list of approved technologies covering renewables and end-use energy efficiency, robust additionality and baseline assessment, and sustainable development criteria drawing on the experience of SSN.

“First movers within the CDM arena will be subject to intense scrutiny, not least because there remains a great deal of scepticism from governments, industry and NGOs alike as to whether it will deliver on its goals of legitimate carbon reductions and promotion of sustainable development,” says Mark Kenber, a senior policy officer at WWF in the UK.

Reactions to the WWF initiative are varied. WBCSD, which itself held a CDM project developers’ forum in South Africa in early May, is cautious. While emphasising that it’s a “valuable initiative”, Susanne Haefeli, in WBCSD’s climate and energy department, says she doesn’t think it will work.“It will add an additional layer of transaction costs and time that will be offputting to project developers,” she says.

This sentiment is echoed by David Hone, London-based vice president of climate change at oil major Shell. “At this early stage of the CDM we have to be very careful that we don’t overburden a system that is barely taking off,” he says.

WWF’s Kenber disagrees: “In the absence of all the rules, we think good quality projects are lower risk, which investors will be prepared to pay for,” he says. “Renewable energy [projects], for example, have a very low risk of nondelivery of emissions reductions, and high quality projects will avoid an NGO backlash that will undoubtedly come with some other types of projects.” Kenber believes the label will appeal to corporate investors that brand themselves on reputation for environmental leadership.

UK oil giant BP falls within that camp. Mark Akhurst, its manager for climate change, says a label would be good for “educating consumers”; and Simon Worthington, who coordinates BP’s flagship work in Brazil on solar installations – being developed as CDM projects – points to benefits for sustainable development if premium carbon prices were recycled back into such projects.

While the Brazil project would be a likely applicant for a WWF label, other CDM project contenders are more environmentally controversial. Shell, BP and other oil companies are looking at the potential to increase the ‘robustness’ of developing country investments in gas or fuel switching through an additional carbon revenue stream. Akhurst points to the high emissions reduction potential, but on the key question of additionality he says that “additionality rules are being discussed and we need to move forward at a sensible pace”.

Steve Drummond, London-based chief executive of GHG brokers CO2e.com, is enthusiastic about a WWF label.Pointing in particular to those that are looking to buy and retire emissions reductions, Drummond says there is already a premium offset market emerging.He adds that a label should also introduce more certainty in the traded GHG market where image is part of the corporate rationale for participating.

Frank Joshua, a managing director at Natsource, is more sanguine.“In the future,” he says,“the buyer will just want to know he’s buying a Kyoto tonne if it’s Kyoto compliance he is looking for.” Joshua doesn’t think the majority will be looking for ‘Kyoto Plus’.To get environment and sustainable development into the mainstream will only really occur when these are written into the Kyoto rulebook, he says.

Lionel Fretz from EcoSecurities agrees that buyers in the compliance market will be looking for the cheapest deal. However, he points out that “in the early stages a label could influence the types of projects being developed by giving a strong steer as to what is acceptable. In other words, impacting behaviour more than price”.

WWF also argues that a carbon label could lower insurance costs. Charles Eyre, lead consultant at London-based Aon Environmental Solutions, agrees that if it is demonstrated that such a label reduces exposure to surprises, and that a company is using best technology and environmental practices, then insurers are likely to take a “more sensible line” vis-à-vis the coverage of exposures and the cost.

The Dutch government, which aims to buy CERs representing around 80 million tonnes of CO₂e to help meet its Kyoto target, acknowledges that sustainable development is a cornerstone of the CDM. As such, it is prepared to pay more for ‘high quality’ CERs, and would welcome the establishment of a relationship between the price of CERs and sustainable development,“for reasons of legitimacy and efficiency”, says a government official. In the absence of this, the government has formulated a proxy sustainability scale for project technologies.

The project list is not so different from that of the WWF – running down through renewable energy, biomass, and end-use energy efficiency to switching out of fossil fuels. Forestry sinks are on the list, but are excluded at present due to lack of rules at the international level.

Avoiding projects which have an inherent risk of ‘social or political agitation’ is also a filter the Dutch government applies at an early stage of assessment.This is difficult to determine precisely, but could the WWF label help provide the Dutch government with an instant credibility factor? “It depends on the quality of the label/criteria and on the level of acceptance by the other parties. If there was broad support we would possibly support them too,” says the official.

If wide support could be generated for high credibility investments,would this effectively get the NGO’s ‘positive list’ of desirable low-risk technologies in through the back-door?

Aldyen Donnelly, president of the Greenhouse Emissions Management Consortium (GEMCo), which has bought millions of tonnes of reductions for nine Canadian energy companies, doesn’t think so. She predicts that every other country will do what the Dutch have done, and come up with their own compliance strategies, including acceptable CDM projects. “A third party like WWF isn’t going to define the international rules,” she says. The questions that will be asked are: what action created the reduction at its source, and two, in which countries can we apply those reductions vis-à-vis the domestic compliance plan.”

Canada is a case in point:“British Columbia won’t accept tonnes reduced from nuclear, Ontario won’t accept the exclusion of nukes credits. Two of our company members don’t want [forestry] offsets, others do,” she says. This is driving a portfolio approach to delivering reductions, and a set of complex bi-lateral and multi-lateral relationships and rules are likely to evolve.”

However, where the rubber hits the road in drafting contracts for offsets – GEMCo expects the seller to understand and absorb the risk associated with potential changes in national regulations, including those stimulated by NGO pressure. Donnelly adds that for sustainable development, like other aspects of the Marrakech Accords, the rules “don’t look like rules to investors, they look like statements of guidance that have yet to be translated into rules.”

Until this process of translation is resolved, then, the NGO community and investors are likely to clash repeatedly on the environmental integrity and sustainable development credibility that CDM projects will need to achieve.

Kirsty Hamilton is a freelance writer and consultant, and former climate change specialist at Greenpeace International.